Copyright law contains a statutory fee-shifting/”loser pays” provision (17 USC 505) that, in specified circumstances, gives the judge discretion to award attorneys’ fees to a copyright lawsuit winner. Veoh decisively won a 512(c) defense against UMG’s copyright infringement claim, so Veoh applied for its attorneys’ fees under 505. The court, exercising its discretion, declined to award them. The court concluded that UMG “played hardball” but its lawsuit was not “improper, in bad faith, or contrary to the purposes of the Copyright Act” and “UMG’s position was not legally untenable.”

I think the judge’s decision is a fair application of the statute, but consider its consequences. UMG helped drain Veoh’s coffers through the litigation, yet the court does not impose any disincentives for plaintiffs to bring such a lawsuit. As a result, UMG walks away from the lawsuit while Veoh goes belly-up.

The next part of the ruling confused me, and maybe my litigator friends can help me understand it. As a fallback position, Veoh asked for its attorneys’ fees under FRCP Rule 68. Rule 68 tries to encourage litigants to settle their disputes by providing a penalty for refusing a reasonable settlement offer. If Party A proposes settlement terms and Party B declines (because it expects to do better in court), but the ultimate judgment is less favorable to Party B than the proposed settlement, Party B has to pay Party A’s costs that accrue post-settlement offer. Rule 68 makes a lot of sense from a game theory standpoint, but I’ve been told by litigators that it doesn’t mean much in practice, and this case might illustrate why.

The court doesn’t provide the terms of Veoh’s Rule 68 settlement offer, but because Veoh won the case, any settlement offer Veoh made by definition was better for UMG than the actual results UMG got. Therefore, on its face, Rule 68 seems to say that, at minimum, UMG should pay Veoh’s costs post-settlement offer.

However, the court looks at the interaction of copyright law’s 505 fee-shifting provision and Rule 68 and, in effect, concludes that 505 moots Rule 68. The court says it couldn’t find any on-point precedent (I haven’t double-checked, but this was the first time I recall seeing any discussion of this interaction), so it cites an analogous case for the proposition that Rule 68 was not designed to expand the bases of fee awards. Thus, because the court had already concluded that Veoh wasn’t entitled to a fee award under the Copyright Act, that eliminated any Rule 68 cost award.

This result makes no sense to me. The ruling makes Rule 68 effectively irrelevant to copyright actions. Based on the court’s reasoning, there’s virtually no circumstance where a copyright defendant eligible for fees would want Rule 68 to apply. 505 allows a court to award ALL of the defendant’s costs, while Rule 68 limits the awardable costs to those incurred post-settlement offer. Rule 68’s calculation is mandatory, not discretionary, so in theory it could set a minimum award for the judge–once the judge decides fees are awardable at all. However, I rarely if ever see a judge who grants a fee award under 505 force the defendant to take a big enough haircut on awardable fees where the Rule 68 calculation would be more favorable. Therefore, if anyone wants Rule 68 to apply, it seems more likely that a losing copyright plaintiff might try to invoke Rule 68 to cap its fee exposure.

The analysis is about the same from the perspective of plaintiffs eligible for fees, except that copyright plaintiffs can only become eligible for a 505 award if they have registered their copyright within the statutory time period. But if they are 505 eligible, I would expect most judges to award all of their attorneys’ fees, not just those post-Rule 68 settlement offer.

While it’s certainly fair game for Congress to decide that Rule 68 is irrelevant to copyright actions, I find it hard to believe that’s what was intended. Rule 68 serves a valuable social policy of encouraging early settlements, and we should value that result in copyright litigation just as much as any other area of litigation. So it seems like someone–either the judge or Congress–screwed up; either way, it should be fixed so that Rule 68 becomes a fallback to statutory fee-shifting provisions rather than being mooted by them.

Although the court doesn’t address it, it seems like its logic should apply equally to the fee-shifting provisions in the patent and trademark statutes. Therefore, if this ruling holds, it appears that Rule 68 is effectively irrelevant to all federal IP litigation. Students looking for paper topics, especially on ADR in IP, the intersection between Rule 68 and the IP statutory fee-shifting provisions seems like a fertile ground for exploration.

UPDATE: The analysis is embedded in a self-promotional post, but Ray Dowd of the Copyright Litigation Blog provides support and a case cite for why he thinks the court made a mistake on the Rule 68 analysis.

UPDATE 2: David Gingras sent the following references:

Jordan v. Time, Inc., 111 F.3d 102 (11th Cir. 1997) says that under Rule 68, a party who makes an offer of judgment in a copyright case and obtains a result better than the offer is entitled to a mandatory award of costs AND fees (because costs are defined by 17 USC § 505 as including fees, and Rule 68 makes an award of costs mandatory). This view seems totally practical and totally consistent with the purposes of Rule 68.

Champion Produce, Inc. v. Ruby Robinson Co., 342 F.3d 1016 (9th Cir. 2003) says the EXACT opposite. The court tried to outsmart everyone else by saying that although the result in Jordan makes sense and seems logical, fees can only be awarded as costs under 17 USC § 505 to the “prevailing party”, and they felt that a defendant who made a $20k or whatever offer of judgment under Rule 68 but then lost at trial in which the plaintiff received a judgment of only $19,999 could not be considered as the “prevailing party” and thus could not recover fees as part of the mandatory costs award under Rule 68. Of course, this completely ignores the purposes of Rule 68 and it rewards plaintiffs who reject settlement offers and seek to roll the dice at trial.

It appears this particular issue is baffling to judges and to many smart litigators. Excellent paper topic.